Financial Analysis - USCA MBA - CH3 SB

Weston's financial planning model shows assets are projected to increase by $2.7 million while liabilities and equity increase by $1.5 million. What is the external financing need (EFN)?

$1.2 million $2.7 million − 1.5 million = $1.2 million.

Dot's financial planning model shows assets are projected to increase by $800,000 but liabilities and equity increase by $395,000. What is the external financing need (EFN)?

$405,000 EFN = $800,000 − $395,000 = $405,000. EFN = (Assets/Sales) x Change in Sales - (Spontaneous Liabilities / Sales) x Change in Sales - Profit Margin x Projected Sales x (1-divident payout ratio)

Which of the following is the correct representation of the cash coverage ratio?

(EBIT + Noncash expenses)/Interest expense

Moore's generated $140,000 in net income and $1.6 million in sales on $2.7 million in assets. The firm has a capital intensity ratio of ______.

1.69 Capitol Intensity Ratio = Total Assets / Sales $2.7 million /$1.6 million = 1.69

BC Corporation's ROA is 22 percent and its plowback ratio is 0.5. What is its internal growth rate?

12.36% Rate of Internal Growth = (Return on Assets x Plowback Ratio) / (1 - (Return on Assets x Plowback Ratio)) (0.22 × 0.50)/(1 − (0.22 × 0.50)) = 12.36%.

Nestor has a net income of $315,000, total sales of $3.52 million, total assets of $4.4 million, and total equity of $1.98 million. What is the return on equity?

15.91% Return on Equity (ROE) = Net Income / Total Equity $315,000/$1.98 million = 15.91 percent.

A firm that generates 18 cents in net income for every dollar in sales has a profit margin of _______ percent.

18

If a firm needs $300 million in new assets and has projected retained earnings of $72.4 million, what is the external financing needed?

227.6 300 − 72.4 = 227.6.

If a firm needs $500 million in new assets and has projected retained earnings of $200 million, what is the external financing needed?

300 million 500 million - 200 million = 300 million

Swenson's return on assets is 14 percent and its plowback ratio is 40 percent. What is the internal rate of growth?

5.93% Rate of Internal Growth = (Return on Assets x Plowback Ratio) / (1 - (Return on Assets x Plowback Ratio)) (0.14 × 0.40)/(1 − (0.14 × 0.40)) = 5.93%.

Cheese Co. had net income of $300 and paid out $125 in cash dividends to stockholders. What is the plowback ratio?

58.33% 1 − ($125/$300) = 58.33 percent.

Turner's return on equity is 12 percent and its retention ratio is 60 percent. What is its sustainable growth rate?

7.76% Rate of Internal Growth = (Return on Assets x Plowback Ratio) / (1 - (Return on Assets x Plowback Ratio)) (0.12 × 0.60)/(1 − (0.12 × 0.60)) = 7.76%.

A firm's return on equity is 18 percent and its retention ratio is 40 percent. What is its sustainable growth rate?

7.76% Rate of Internal Growth = (Return on Assets x Plowback Ratio) / (1 - (Return on Assets x Plowback Ratio)) (0.18 × 0.40)/(1 − (0.18 × 0.40)) = 7.76%.

Which of the following are traditional financial ratio categories? - profitability ratios - market value ratios - real options ratios - asset management ratios

Asset Management Ratios Profitability Ratios Market Value Ratios

Financial statements report ______.

Book Values

Which of the following items are used to compute the current ratio? - equipment - accounts payable - earnings - cash

Cash Accounts Payable

How is the inventory turnover ratio computed?

Cost of goods sold/Inventory

The _________ identity can help to explain why two firms with the same return on equity may not be operating in the same way.

DuPont

All else equal, a higher profit or ________ margin is preferable.

EBITDA

How is the EBITDA margin computed?

EBITDA/Sales

As long as all sales requests are being met, a ______ inventory turnover ratio is better.

Higher

Which of the following is true about the sustainable growth rate?

It is the maximum rate of growth a firm can maintain without increasing its financial leverage.

Long-term debt on the common-size balance sheet of Solid Rock Construction over the past 3 years is 30 percent, 34 percent, and 40 percent, respectively. This indicates that the firm has increased its ______.

Leverage

A common-size income statement helps compare financial results over time by controlling for changes in sales.

Liquidity

Current assets on the common-size balance sheet over the past 3 years have increased from 32 to 35 percent, while current liabilities have decreased from 29 to 25 percent. This indicates the firm has increased its ______.

Liquidity

Short-term creditors are interested in ________ ratios.

Liquidity

How is the price-earnings (PE) ratio computed?

Market price per share / Earnings per share

How is sustainable growth calculated when equity used in the calculation of ROE is the beginning value?

ROE × b When equity used in the calculation is the beginning value, sustainable growth rate = ROE × b.

Which of the following represents the receivables turnover ratio?

Sales/Accounts Receivable =

Which two of the following groups are most interested in liquidity ratios? - short-term creditors - tax authorities such as the IRS - stock analysts - bankers

Short-Term Creditors Bankers

________ financial statements provide for comparison of firms that differ in size.

Standardized

What does an inventory turnover ratio of 5 mean?

The entire inventory was sold and replaced 5 times during the year.

Which one of the following statements is most likely correct for a firm with days' sales in receivables of 30 days? - Annual sales are about 10 times accounts receivable. - Cost of goods sold is about 12 times accounts receivable. - The firm finances approximately 8 percent of its annual sales at any given time. - The receivables turnover rate is roughly 9 times.

The firm finances approximately 8 percent of its annual sales at any given time. 30/365 = 8%

What does a current ratio of 1.2 mean?

The firm has $1.20 in current assets for every $1 in current liabilities.

What does a current ratio of 1.4 mean?

The firm has $1.40 in current assets for every $1 in current liabilities

Which one of the following equations defines the total asset turnover ratio?

Total asset turnover = Sales/Total assets

The capital intensity ratio is the reciprocal of the total _______ turnover ratio.

asset

The days' sales in receivables are frequently called the ______.

average collection period

The sustainable growth rate is computed as ROE × b when equity used is at the ______ of the period.

beginning

Typically, enterprise value uses _____ value of debt because it is widely available.

book

The ratio of total assets to sales is known as the _____.

capital intensity ratio

The ratio of total assets to sales is the ______.

capital intensity ratio

Which of the following are often left out of most financial planning models? - equity growth, cash flow, and financial leverage - sales growth, asset growth, and equity growth - profit margins, financial leverage, and turnover - cash flow size, risk, and timing

cash flow size, risk, and timing They do consider profit margins, financial leverage, and turnover.

The difference between ROA and ROE reflects the use of _______ financing.

debt

The total _______ ratio is equal to the total assets minus total equity all divided by total assets.

debt

The cash coverage ratio adds ______ to operating earnings (EBIT) for a better measure of how much cash is available to meet interest obligations.

depreciation and amortization

A one-time profit from an asset sale makes it ______ to compare financial statements.

difficult

All else equal, when the rate of growth in sales or assets in a financial plan is higher, __________ financing needs will be greater.

external

Given an internal growth rate of 5 percent, for a firm to grow by 10 percent, it will need ______.

external financing

All else equal, when the rate of growth in sales or assets in a financial plan is higher, external financing needs will be ______.

greater

Given an internal growth rate of 3 percent, a firm can _____.

grow by 3 percent or less without any additional external financing

A ______ PE ratio may indicate that investors believe a company has better prospects for future growth in earnings.

higher

When analyzing financial performance over time, all else equal, a(n) ______ profit or EBITDA margin is preferred.

higher

Generally, the ______ the inventory turnover ratio, the ______ efficiently the firm is managing inventory.

higher; more lower; less

An increase in the profit margin will ______ a firm's sustainable growth rate.

increase

An increase in a firm's total asset turnover will ______ the sustainable growth rate.

increase Sustainable growth is ROE × b = (Profit margin × Total Asset Turnover × Equity Multiplier) × b. An increase in total asset turnover will increase ROE, which increases sustainable growth.

Financial planning is a(n) _____ process.

iterative

If a company has inventory, the quick ratio will always be ______ the current ratio.

less than Since the quick ratio excludes inventory, it will always be less than the current ratio.

A lower PE ratio may indicate that investors believe a company has ______ prospects for future growth in earnings.

lower

The price-earnings (PE) ratio is a ____ ratio.

market value

How is the market-to-book ratio measured?

market value per share/book value per share

Which ratios use information that is not contained in financial statements? - market value ratios - liquidity ratios - profitability ratios - leverage ratios

market value ratios

Enterprise value is the sum of a firm's market capitalization and the ____ value of its interest-bearing debt ______ any cash on hand.

market; less

EBITDA is a measure of _____ operating cash flow.

pretax

The percentage of sales approach will produce _________ _________ financial statements.

pro forma

Return on equity (ROE) is a measure of _____.

profitability

Net income divided by total equity is defined as ______.

return on equity

If a firm maintains a constant debt-equity ratio and dividend payout ratio and does not use any new external equity financing, the firm can grow at a rate no greater than its _______ growth rate.

sustainable

If a firm maintains a constant debt-equity ratio and dividend payout ratio and does not use any new external equity financing, the firm can grow at a rate no greater than its _________ growth rate.

sustainable

If a firm maintains a constant debt-equity ratio and dividend payout ratio and does not use any new external equity financing, the firm can grow at a rate no greater than its _____.

sustainable growth rate

The maximum rate of growth a firm can maintain without increasing its financial leverage is ______.

sustainable growth rate

A firm has a total debt ratio of 0.30 times. This means the firm has ___ in total debt for every $1 in total assets.

$0.30

A pro forma balance sheet indicates that total assets will increase by $300,000. If a debt-equity ratio of 0.5 is maintained, then debt must increase by _____.

$100,000 If D/E = 0.5, an increase in assets of $300,000 will be financed with $100,000 of debt and $200,000 of equity. $100/$200 = 0.5.

If a firm has a receivables turnover of 13.65 times and accounts receivables of $200. What is the sales?

$2,730 Receivable=Sales/Accounts Receivable

Last year, Benton, Inc., had a net income of $3.5 million and paid out $700,000 in cash dividends. If income this year is $4.1 million and the dividend payout ratio is held constant, how much will be paid in dividends?

$820,000 $4.1 million ($700,000/$3.5 million) = $820,000.

Which three of the following are most apt to create problems when comparing financial statements for multiple firms? - differing accounting methods - differing fiscal years - seasonality - differing levels of cash

- differing accounting methods - differing fiscal years - seasonality

A firm has a total debt ratio of ______ times. This means the firm has $0.20 in total debt for every $1 in total assets.

0.20

Assume current assets = $48; fixed assets = $125, current liabilities = $42, and equity= $100. What is the total debt ratio?

0.42 Debt ratio is debt/total assets. To compute debt, you need to subtract equity from assets. So debt = ($48 + 125 − 100) = $73, and assets = ($48 + 125) = $173, and debt ratio =$73/$173 = 0.42.

A firm with $900,000 in sales, cash on hand of $1,150,000, liabilities of $400,000 and total assets of $2 million has a total asset turnover of ______ times.

0.45 Total Asset Turnover = Sales / Total Assets

BT Tools has current assets totaling $9.2 million, including $4.3 million in inventory. The company's current liabilities total $8.1 million. What is the quick ratio?

0.60 ($9.2 million − 4.3 million)/$8.1 million = 0.60.

A firm with $600,000 in sales, cash on hand of $750,000, liabilities of $200,000, and total assets of $1 million has a total asset turnover of ______ times.

0.60 Total asset turnover = $600,000/$1 million = 0.60.

Assume current assets = $11,300; long-term liabilities = $45,000; and total debt = $54,800. What is the current ratio?

1.15 $11,300/($54,800 − 45,000) = 1.15

A firm with $0.25 in debt for every $1 in assets has an equity multiplier of ______.

1.33 $1/($1 − 0.25) = 1.33.

Assume cash = $120, inventory = $470, accounts payable = $811, accounts receivable = $510, and total assets = $21,400. What is the current ratio?

1.36 ($120 + 510 + 470)/$811 = 1.36

What is the debt-equity ratio for a company with $3.5 million in total assets and $1.4 million in equity?

1.5 Total debt = assets − equity ($3.5 million − 1.4 million) = $2.1 million debt/equity = $2.1 million /$1.4 million = 1.50. (Equation 3.5)

Vera has earnings per share of $3 and dividends per share of $1.20. The stock sells for $30 a share. What is the PE ratio?

10 times $30/$3 = 10 times

BC Corporation has 1,800 shares outstanding and earned $2,700 last year on assets of $2 million and equity of $1.5 million. What is the PE ratio if the stock is currently selling at $18 per share?

12 times Market Value / (Amount Earned / Shares Outstanding) $18/($2,700/1,800) = 12 times.

A firm has an operating profit (EBIT) of $600 on sales of $1,000. Interest expense is $250 and taxes are $120. What is the times interest earned ratio?

2.40 EBIT/Interest = $600/$250 = 2.40.

Omega Co. has annual sales of $250,000, costs of goods sold of $168,000, and assets of $322,000. Accounts receivable are $86,200. What is the receivables turnover?

2.90 Receivable Turnover = Sales / Accounts Receivable

Alpha Omega's percentage of sales model forecasts sales growth of 20 percent next year. If cost of good sold is proportionate at 80 percent of sales, then cost of good sold will increase by _____.

20 percent

AC Motors has net income of $51,750, total assets of $523,400, total debt of $267,000, and total sales of $491,300. What is the return on equity?

20.18% ROE = NI/Equity. Equity = Assets − Debt $51,750/($523,400 − 267,000) = 20.18 percent.

Alder Inc. has net income of $403,000, operating earnings of $640,000, sales of $1.23 million, and total assets of $1.48 million. What is the return on assets?

27.23% $403,000/$1.48 million = 27.23 percent.

BC Toys has total equity of $584,000. There are 35,000 shares outstanding at a market price of $54 per share. What is the market-to-book ratio?

3.24 times Market Price / Book Value $54/($584,000/35,000) = 3.24 times

What is the EBITDA margin if a firm's EBITDA is $175, sales are $540, and net income is $60?

32.41% $175/$540 = 32.41 percent.

What is the EBITDA margin if a firm's EBITDA is $125, sales are $350, and net income is $80?

35.71 percent EBITDA Margin = EBITDA/Sales

AD corporation had sales of $750,000 and costs of goods sold of $350,000. Inventory at year end was $87,500. What is the inventory turnover?

4.00 times Inventory Turnover = Costs of Goods Sold / Inventory

When the typical stock in the S&P 500 Index has a PE ratio of 12, a company with a PE ratio of 15 may have ______ than average growth prospects, given similar earnings per share.

higher

The information needed to compute the profit margin can be found on the ____.

income statement Profit margin = Net income/sales

In a financial plan using the percentage of sales approach, as total assets increase, total liabilities and equity will ______.

increase

Alpha Star's net income is $300 on $2,000 of sales. The company has $5,000 in assets and equity of $3,000. The firm paid out $125 in cash dividends. What is the dividend payout ratio?

41.67 percent Dividend Payout Ratio = Cash Dividends / Net Income Payout ratio = Cash dividends/Net income = $125/$300 = 41.67 percent.

A firm with a profit margin of 6.8 percent generates ______ cents in net income for every one dollar in sales.

6.8 Profit margin is net income/sales, so if profit margin is 6.8% and sales are $1, net income is 6.8 cents.

BC Corporation has net income of $176,000, sales of $1,982,000, and total assets of $2.24 million. What is the return on assets?

7.86% Return on Assets = Net Income / Total Assets $176,000/$2.24 million = 7.86 percent.

BC Corporation had a net income of $3.5 million and paid out $700,000 in cash dividends to stockholders. Their plowback ratio is ______ percent.

80 Plowback Ratio or Retention Ratio = Retained earnings divided by net income PB = ($3.5 million − $0.7 million)/$3.5 million.

In a financial plan using the percentage of sales approach, why is it assumed that some assets increase with sales?

Additional working capital and fixed assets are needed to support growth.

Which of the following are noncash expenses on the income statement? - amortization expense - interest expense - income tax expense - depreciation expense

Amortization Expense Depreciation Expense

If sales increase while there is no change in accounts receivable, the receivables turnover ratio will ______.

increase Receivables turnover = Sales/Accounts receivable. If sales increase and there is no change in receivables, receivables turnover would increase.

Financial analysis uses EBITDA over EBIT because the former adds back ______ and _____ and is thus a better measure of pretax operating cash flow.

Amortization Expense Depreciation Expense EBITDA adds back depreciation and amortization expenses to remove the effect of those noncash items from EBIT.

Which of these computes days' sales in receivables?

Days sales in receivables = 365/Receivables turnover.

Which one of the following is the correct equation for computing return on assets (ROA)?

ROA = Net income/Total Assets.

What does ROE equal?

ROA × Equity multiplier

A common-size income statement helps compare financial results over time by controlling for changes in ______.

Sales

Utilization ratios measure how efficiently a firm uses ______.

assests

The current ratio computes the relationship between ____.

current assets and current liabilities

Which of the following are traditional financial ratio categories? - liquidity ratios - turnover ratios - employee ratios - real options ratios - financial leverage ratios

liquidity ratios turnover ratios financial leverage ratios

When the typical stock in the S&P 500 Index has a PE ratio of 12, a company with a PE ratio of 7 may have ______ than average growth prospects, given similar earnings per share.

lower

Financial planning using the percentage of sales approach produces _____.

pro forma financial statements

Return on assets (ROA) is a measure of _____.

profitability

Market value measures can be calculated for ______.

publicly traded companies

Income statement items that are affected by ______ will be included in the percentage of sales approach.

sales

The percentage of sales approach separates accounts on the pro forma income statement and balance sheet into those that change directly with ____ and those that do not.

sales

The profit margin is equal to net income divided by ______.

sales

What does it mean when a company reports ROA of 12 percent?

The company generates $12 in net income for every $100 invested in assets. ROA = Net Income/Total Assets. A ROA of 12 percent means that for every $1 in total assets, the company generates $0.12 of net income, so for every $100 in total assets, the company generates $12 in net income.

What is the impact on the total asset turnover ratio if sales increase significantly while there is no change in any of the other variables?

The total asset turnover ratio will increase. Total asset turnover = Sales/Total assets. If sales increase with no change in total assets, the total asset turnover ratio will increase.

Which of the following is the correct representation of the total debt ratio?

Total debt ratio = (Total assets − Total equity)/(Total assets).

True or false: A good working knowledge of financial statements is desirable because such statements are the primary means of communicating financial information both within and outside the firm.

True Financial statements are the primary means of communicating financial information both within and outside the firm

Which of the following are traditional financial ratio categories?

Turnover Ratio Financial Leverage Ratio Liquidity Ratio

A firm that collects credit sales quickly will have ______ days' sales in receivables than a comparable firm.

a lower